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Reddit day traders tried to beat Wall Street at its own game to prove the system has been manipulated.
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Instead, brokers shut them out and their assets tanked, with some hedge funds still making big wins.
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Experts said the Wall Street response showed just how stacked the deck is relative to small investors.
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Keith Gill, the day trader and member of the Reddit group WallStreetBets widely credited with fueling GameStop’s recent trading frenzy, claimed in late January that he turned his $ 54,000 investment into a $ 48 million dollar fortune.
Days later, it had been cut by more than half to $ 22 million, and regulators had set their sights on Gill and investigated him for possible violations of the disclosure.
Many private investors fared much worse. A Robinhood user lost $ 70,000 in savings and contemplated suicide. Another, Alexander Kearns, did.
GameStop’s stock, which had peaked at over $ 480, had fallen to around $ 52 as of Friday.
Before the rollercoaster derailed, however, a hedge fund walked away with a profit of $ 700 million, brokerage app Robinhood raised billions in new funding after forcing its users to buy stock, and trading giant Citadel likely made a hefty sum on the increased market volatility.
While the dust is far from settling and some Wall Street businesses have lost a lot, a David against Goliath victory now hardly seems like the most likely outcome.
It had also made for a compelling story: an army of private investors – without deep pockets, sophisticated trading algorithms, proprietary market data, or other trading tools – banded together to defeat powerful, corrupt financial institutions at their own game.
Ultimately, though, Wall Street and other major investors still seem to have landed on top, and experts, at least outside the industry, say it’s that outcome that further proves how the system was rigged.
Insider spoke to three financial markets experts, none of whom work for traditional financial services firms. They said there is still a lot of work to be done to make the markets work for small investors again, and, just as importantly, to restore public confidence that the markets can do just that.
“Tailored to the general public”
“The whole business is basically a power dynamic … it’s aimed at favoring the big over the small,” Garphil Julien, a research associate at the Open Markets Institute anti-monopoly think tank, told Insider. “Those with huge amounts of capital, huge amounts of money, will use their power to actually get what they want, and when they get what they want, someone else will lose,” he said.
He is not alone in that assessment.
According to a recent CNBC poll, a record-breaking 57% of Americans view the stock market as merely a reflection of how businesses and the wealthy are doing, not the rest of the country. So are financial elites and Republicans, both historic defenders of free markets.
“Is the market really fair to individual investors? Is it really competitive? What we see is that it isn’t,” said Julien.
As former Wall Street analyst Alexis Goldstein recently put it in an op-ed for The New York Times, “Wall Street’s edge over retailers remains, as always, structural,” and even as a bunch of Redditors unite, “the house still wins. But, she said, “instead of betting on the dubious promise that more Americans will gain access to the casino, it’s time to rewrite the rules to make sure the house doesn’t always win.”
Julien said this means adding more consumer protection and tackling the monopolization of different segments of financial services. For example, he pointed to brokerage apps, such as E * TRADE, owned by Morgan Stanley, and TD Ameritrade, owned by Charles Schwab.
Making money by “making money”
Another problem underlying the GameStop saga is that too many Wall Street companies have gotten into companies inherently designed to pull as much money as possible out of the financial system for their own gain, rather than help allocate it to applications that would help the economy in general. .
Amid last month’s trading frenzy, the markets ended up being fairly resilient, but that doesn’t mean they operate in ways that protect smaller investors who have more to lose.
“There will be a temptation to say … the market is not broken, everything is fine,” Barbara Roper, director of investor protection at the Consumer Federation of America, told Insider. “While it is true that the market is not yet broken, I don’t think everything is in order.”
Roper said it is good to focus on improving transparency and accountability around practices that may pose conflicts of interest, such as payment for order flow, both of which Robinhood and Citadel are investigating, but that the problem is also much more fundamental and widespread.
Read more: Robinhood earns hundreds of millions from sales of customer orders. That business model is about to come into the picture.
“The financial services industry itself has broken a little bit away from the more dull and less profitable task of helping direct capital to its best use in support of the productive economy, and for a while has made most of its money by making money,” Roper said.
“Financial companies make all their money from securing everything under the sun,” she said. “They’ve found a way to make it really profitable, and so they’re chasing the profit even though the niche is crowded.”
But that problem “was at the heart of the last financial crisis, and we haven’t solved it there,” Roper said, referring to the 2008 financial crisis.
Since then, there have been several near-crises and the problems have only gotten worse.
Robinhood itself has been criticized – and fined $ 65 million by the Securities and Exchange Commission – for high-frequency trading, a controversial practice that uses powerful software to execute large transactions in fractions of a second, allowing companies to monetize temporary changes in the price of shares. Wall Street banks are even dodging derivatives trading regulations – the same risky behavior that triggered the 2008 crisis – according to financial blog Wall Street On Parade.
Roper said she also doesn’t see dangerous Wall Street business models being tackled anytime soon.
“If we didn’t do it when Wall Street literally pushed the global economy to the brink of collapse, then I don’t think we’re going to do it now because some people on Reddit put some pressure on them briefly and caused some chaos in the markets for a few. weeks, “she said.” I think I’m just as cynical as the folks on WallStreetBets. “
“Wider Public Outrage”
Part of Americans’ frustration with the current financial system is that it has become so complex that only Wall Street insiders seem to really know how everything works, something the industry is using to its advantage to avoid the debt in situations like GameStop .
“It’s another episode similar to the one from the past where the audience feels that there are several things wrong here – not really knowing what exactly is wrong, but just feeling like something isn’t working,” says Graham Steele, senior fellow at the American Economic Liberties Project, told Insider.
“It’s just a common popular feeling that a system in which this kind of scenario can take place is just fundamentally not working for the audience and it’s ‘rigged’ or something else, but they know something is wrong.”
Steele also said growing inequality, botched pandemic responses and polarization around the election amplified GameStop anger: “It feels like putting another financial episode on top of other broader public outrage.”
This is reflected in voices across the political spectrum that have criticized Wall Street in recent weeks: progressive Democrats like Rep. Alexandria Ocasio-Cortez and Senator Elizabeth Warren; far-right Republicans such as Senator Ted Cruz; and tech investors like Elon Musk and Mark Cuban.
But that’s where their agreement ends, with Democrats typically favoring government intervention, and Republicans typically pushing for more transparency and then letting the markets do the rest.
“In terms of the people of Silicon Valley,” Steele said, “they portray themselves as some kind of populists, but a lot of them have their own kind of financial interests at stake here. Many of their solutions are like, don’t use that app, use the app I invested in. “
“I just don’t see Elizabeth Warren going out to pump someone else’s trading app because a venture capitalist has said, ‘that’s the right thing to do’,” he added.
Elon Musk, for example, has been hyping cryptocurrencies like Dogecoin for the past few weeks.
Ultimately, all three experts agreed that making markets more equitable and in line with the health of the broader economy requires reforms that go well beyond financial services.
“Restoring that system requires a range of policy solutions ranging from financial regulation and taxation to how we structure the pension system to how we provide healthcare to people,” Steele said.
Read more: The SEC follows GameStop’s trading frenzy. This is why lawyers and former regulators say it will be difficult to restrict the market.
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